I'm a bit of a contrarian when it comes to funding an account for new traders. Although in the long run proper capital is important, for a new trader perhaps it's better that he/she start with a small account. Working with a small account can teach a trader how to protect his/her capital with smart stops and efficient setups for trades. Working with a large account from the git-go may just encourage a new trader to say "Tomorrow is another day" and continue to bleed the account with crazy trading until he/she blows it. I recognize that an account can be refunded, but the idea here is to learn the discipline of managing your money. If you can do it with a small account, you certainly will be able to do it with a well-funded, fully capitalized account.
We may agree to disagree a little on this subject.; although I understand your points.
I take the view that the new trader has ample opportunity to hone their skills on paper or sim. Treat the strategy as real , using their desired sim fund allocation as if it were real money (what they intend to invest),and be absolutely sure they are comfortable with the strategy,including trade management.If the new trader cannot apply the necessary discipline in the 'testing' phase they have no business trading .
The new trader can start small,say 25% of their available funds, blow it: and think "well there is tomorrow and I have 75% left". Their leverage is bumped up and I'll bet you they try to "catch up". Fodder.
Personally, I believe the trader has a reasonably good chance to succeed if their set up is sound and are prepared to plod along with 1-2 contracts,regardless of type, for every 10000.If successful, 2-3 when they hit 25-30000.Will take time, but no business became a Fortune 500 company in a year.
Starting with much less must cause some unnecessary stresses on the trader and will likely become 'fodder' in time.
Having a mentor/advisor to map out the potential pitfalls of poor money management and risk: reward relationships would be extremely useful to a new trader ,even a "surviving" trader for that matter. Unfortunately, most new traders seem to think they have the answers.
Just thinking aloud, it may be some thing like a "thread" that could be set up where new traders could seek advice from others related to trade management etc. I certainly don't have all the answers,don't have much patience for dogmatism, but would be willing to help.
Well a couple of thoughts here. You mentioned stress - traders have to get used to stress - it's part of the business. What you have to learn is how to control your stress while acknowledging that it's always there. My level of stress goes up as soon as I pull the trigger. All the possibilities of a trade outcome are running through my head. Everyone wants to be right, but acknowledging that you can be wrong is stressful, but very necessary.
About sim, I think it's great to get used to the markets and test strategies. But psychologically, a trader must get used to the real thing, stress and all. I've had a few people who I've helped along the way who have said "I can do it in sim, but I always pick the wrong trade when live". Well, if that's the case, then dump the sim and get on with real life and learn how to manage the real world of trading.
What I've done with a few people is tell them to open an account for $2,500. I give them a simple setup, a few rules to follow and trade 1 contract for 1 point, one trade a day max, 1 point stop, every day picking out the best opportunity to execute that setup. That's it. No scaling, no rocket science. After a few weeks or a month, run your statistics and see how you did. Did you follow the rules? Did you pick a good execution point? What could you have done better? Not a lot of risk here. Just a real time learning experience. If someone blows their account after a few months doing this and can't follow the rules of a simple setup, then they should probably look for another career. Depending on market conditions, they may make a few bucks or they might come out slightly negative - but that's okay, as long as they followed the rules.
You have a good idea about a mentor's thread - accumulate some helpful stuff for traders, new and old, because it will benefit everyone, myself included.
No one is touching on a particular aspect, which is not everyone is cut out to be a trader. If you are not, it's just not gonna happen. Maybe because there are things in one's psychology that would require an insurmountable effort to change, or any number of other reasons or causes. It may be a hard reality to face, but I think sometimes that is just simply the case.
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Whether or not inadequate capital is the 'root' cause or not, would make for a long and probably pointless discussion. It is absolutely one of the main ones.
However, an account of any size does a trader no good if they don't learn to win more than they lose. Any trader can lose a significant part of their account, even with good money management, through a death of a thousand cuts. Sure, a 'large' account might reduce stress and fear of getting wiped out really quickly and will allow time for more learning (e.g. losses) but at the end of the day you have to know that you've got to learn, acknowledge when you aren't learning and then modify your approach.
Money management and capital pose an interesting problem. For argument's sake let's say you have determined that $25,000 is 'adequate' capital and that with money management you never lose more than 1% of your capital in one trade or even in one day. However, after 6 months you find that you have lost $5,000 and now have only $20,000 in capital. Does this mean you can no longer trade because you 'need' $25k to have adequate capital? If the answer is that you can trade with $20k but you need to change your money management strategy then you would have to ask yourself why you didn't do that in the first place. This scenario of course then continues ad nausea when your $20k shrinks to $15k and so on.
PS - Here's an 'amusing' anecdote. I was looking at moving to another broker working with an algo system. He said that all I really needed to fund the account was $15k but recommended $25k. His reasoning was partly to weather any drawdowns but his 'key' argument was that if I lost $5k of $25k I wouldn't feel so bad because I had only lost 20% of my capital instead of 33% if I invested only $15k. Perception and perspective are really interesting things.
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